Second Mortgage vs HELOC: Which Is Right For You?

Second Mortgage vs HELOC: Which Is Right For You?

Real estate values have risen over the past few years and many owners have seen their equity rise, too. What is equity? It’s the difference between the current market value of a property and the amount you owe on a mortgage on the property, expressed as a percentage. Let’s say your property’s current value is $200,000 and you owe $100,000 on your mortgage. Since you owe less than what the property is worth, you have positive equity of 50%. And, if you’re like a lot of property owners, you may be interested in using that built-up equity to get access to cash to pay for other expenses.

A home equity loan, also called a second mortgage, or a home equity line of credit (HELOC) are two popular options. Both are types of financing secured by the property and the amount you can borrow is determined by your equity in the property, and some other guidelines determined by the lender. There are differences between a second mortgage and a HELOC, so which is right for you?

What is a HELOC?

A HELOC is a line of credit from which you can make withdrawals – called advances – over and over, up to a preset limit during the “draw period” which is usually the first 10 years. You make interest-only payments on the amount of money advanced to you during the draw period, but you can also repay the advanced amount if you want to. HELOCs have a variable interest rate during the draw period. This can make it challenging to plan your budget because your payment increases if interest rates go up.

At the end of the draw period, you cannot take any more advances, and any advanced money that you have not repaid is converted into a fixed rate loan, usually for a 20-year term. You make regular monthly payments until the loan term ends or the loan is fully repaid.

What is a Second Mortgage?

A second mortgage gives you a lump sum of money (the principle) all at once. The interest rate is fixed which means your monthly payments will not change over the life of the loan, which can make it easy to plan your budget.

How can I use the funds?

Both second mortgages and HELOCs provide funds that can be used in a variety of ways. You could pay for a family vacation, buy a car or pay for your child’s tuition. Maybe you’ve found a great real estate opportunity to purchase an income-producing property like an apartment, condo or home you can rent. Or maybe you want to consolidate higher interest debit or pay off your credit card bill. You can use the funds to cover all these costs.

One important note… recent changes to the tax law, in effect through 2025, no longer allow borrowers to deduct interest payments on second mortgages or HELOCs unless the money is used to renovate, remodel, upgrade or improve the property securing the loan. Other rules apply, so check with a professional tax advisor before you claim this deduction.

The Bottom Line
Second mortgages and HELOCs are a great option to get a cash infusion when you have equity in your home. They both have advantages and disadvantages:

  Second Mortgage HELOC
  • Lump sum of cash, that you can use to pay for large expenses
  • The interest rate is fixed so you know the exact amount of your monthly payment
  • Interest rates are usually lower than credit cards
  • Interest payments may be tax deductible (talk with a tax expert)

  • Revolving line of credit, like a credit card, that you can tap into again and again, as much as you need up to the preset credit limit
  • Interest payments may be tax deductible (talk with a tax expert)
  • Secured by an asset (your home) so if you stop making

    payments you could lose your home

  • Monthly payments could increase if interest rates rise
  • Monthly payment amount at the end of the draw period could be above your budget if you have a large advance and interest rates rise
  • Secured by an asset (your home) so if you stop making payments, you could

Benworth is a licensed lender for second mortgages up to $25,000 on residential properties located in Florida, with no application fee and repayment terms up to five years. Even if you have a less than perfect credit score, qualifying is easy and funding is fast. Click here to learn more.

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